High Beta FX Mildly Bid as Risk Appetite Improves

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Market Drivers for October 11, 2013
No DC deal yet but negotiations continue lifting risk trades
Japanese CGPI continues to rise 0.3% vs. 0.2%
Nikkei 1.48% Europe -0.07%
Oil $102/bbl
Gold $1289/oz.

Europe and Asia:
JPY CGPI 0.3% vs. 0.2%
EUR GE WPI 0.7% vs. 0.5%

North America:
CAD Unemployment 830 EST

High beta FX was mildly higher in Asian and early European trade today as risk appetite improved on hopes of a resolution to the US government shutdown and debt limit ceiling crisis. Yesterday Republican lawmakers and President Obama had their first meeting on the matter and although no compromise was reached both parties are continuing to work on a negotiated solution.

With October 17th deadline looming, the pressure is on policymakers to come to some sort of an agreement before the US government runs out of cash and stands in danger of a technical default on its sovereign obligations. With public polls showing massive disapproval of the GOP tactics, the pressure on Republicans to come to the table has increased markedly and investors appear to be much more confident that some sort of deal will be reached shortly.

With little economic news on the docket, currencies took their cue from the equity markets and strong performance in Asia where both Nikkei and Shanghai were up by more than 1% helped to boost high beta FX. EUR/USD cleared the resistance at 1.3550 and popped some stops to trade as high as 1.3565 while cable just touched the 1.6000 figure before retreating slightly.

However, the strongest expression of risk appetite was in the USD/JPY which punched its way through 98.50. Just two days ago the pair nearly fell to 96.50 as fears of a default grew.

Although investor sentiment has clearly improved it needs to be noted that no deal has been done yet and both parties may still be too intransigent to compromise. As the weekend approaches the pressure on Washington will escalate and markets will likely begin to lose patience if they see no progress on resolving the crisis.

With US Retail Sales scrapped due to the government shut down, the market will only get the U of M data today which is likely to show a steep drop off in confidence given the sharp decline in the daily Gallup poll reading. However, its doubtful that markets will give this report much weight as it will be viewed more a protest vote rather than a true pullback in consumer sentiment.

If a tentative deal can indeed be reached before the end of the day risk trades are likely to push higher with yen crosses performing best as USD/JPY will likely target the 99.00 figure. If however the situation remains unresolved, USD/JPY could see some selling on the close as risk aversion fears return. We end the week the same way we started it – by watching Washington DC.

Boris Schlossberg
Managing Director

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